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Don't Hang Up on China Mobile

Ignore the near-term static. Shares of China Mobile should ring up further gains in '07.

Has China Mobile(NYSE:CHL) lost its connection with investors? After all, since peaking in early November, shares of China's dominant wireless player have fallen some 10% while those of competitors such as China Unicom(NYSE:CHU), China Netcom(NYSE:CN), and China Telecom(NYSE:CHA), have advanced an average of 23%.

While a bit of this recent pullback can be attributed to simple profit-taking -- shares of China Mobile are still up more than 71% since the beginning of the year -- it seems that a few additional issues are causing some static with investors. These concerns include a possible reweighting of China Mobile's position in Hong Kong's Hang Seng Index, rumors that China Mobile could be interested in buying (and overpaying for) Hutchinson Whampoa's European 3G mobile-phone business, and worries about the possibility of increased competition in China's mobile market once the government gets around to issuing long-awaited licenses for 3G wireless services.

Are these valid concerns? Yes.

Are they reason enough for investors to hang up on China Mobile's stock? My answer is an emphatic no.

In Foolish terms, I believe that these issues have been blown out of proportion in relation to China Mobile's fundamentals and that the recent retreat is a good entry point for long-term, risk-tolerant investors.

Let's address each of these issues, shall we?

Hang Seng rebalancingIn all likelihood, I think that China Mobile's weighting in the Hang Seng Index will indeed be diluted when the rebalancing occurs. This year's IPOs of Bank of China and the Industrial and Commercial Bank of China alone garnered roughly $33 billion, and both banks are now among the 10 largest banks in the world according to market capitalization. Obviously, their size will command a commensurate weighting within the Hang Seng, and China Mobile's weighting among others will, by necessity, decrease. That being said, I believe that this is a one-time event, and the news is already priced into the stock.

HutchinsonrumorThat's all it is -- a rumor, and one that I find implausible for two reasons:

1. China Mobile has consistently expressed an interest in expanding into other emerging markets, not slow-growing, saturated markets like those in Europe.

2. Management has shown a great deal of discipline in terms of not overpaying for assets.

A prime example of both points is China Mobile's recent pursuit of Luxembourg-based Millicom, a cellular operator with networks in 16 developing nations. China Mobile later dropped the pursuit when the asking price was deemed excessive. Simply put, I can't see management wanting to enter the brutally competitive European market or willing to pony up the cash to buy Hutchinson's 3G European assets -- assets that would certainly command more than the $14 billion that Vodafone (MYSE: VOD) is thinking about offering for Hutchinson's cellular holdings in India.

Increased competition in ChinaThe Chinese government is reportedly going to issue long-awaited 3G cellular licenses in the next couple of months, and two of those licenses are likely to go to China Netcom and China Telecom, the country's dominant fixed-line providers, which have previously had no wireless exposure. While the addition of these two players might eventually increase the competitive pressure on China Mobile, I think the issue is a non-starter at present.

Remember that China Mobile currently holds a 66% share of the country's cellular market, is adding subscribers at roughly four times the rate of China Unicom, and has the most financial flexibility of any of China's telecom operators, with roughly $18 billion in cash, compared with the combined $4.9 billion on the balance sheets of its competitors. Simply put, I believe that China Mobile will have a competitive advantage in terms of building out and operating the upcoming 3G networks. Furthermore, the company's strong brand name and massive subscriber base should allow it to capture the lion's share of customers interested in obtaining 3G services.

Hmmm ... the competition doesn't seem that tough now, does it?

ConclusionAs you can see, these issues seem to be overblown, especially in light of China Mobile's compelling valuation. At a recent price of $40.65, shares of China Mobile trade at roughly 16 times fiscal 2007 estimates -- a 20% discount to the company's projected growth rate -- while offering a yield of close to 4%. Considering that its competitors all trade at substantial premiums to their estimated growth rates and offer yields significantly smaller than China Mobile's, I believe that long-term, risk-tolerant investors might want to ring up the company's financials and take another look.

Fool contributor Will Frankenhoff is enjoying his time writing for the Fool more than reading The Financial Times, rooting for the Jints, or taking a nap. He welcomes your feedback at elves1us@yahoo.com. He does not own shares in any of the companies mentioned above. The Fool has a disclosure policy.